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The polar vortex is wreaking havoc on the middle of the country. The Texas power grid, in particular, is struggling with iced-up wind farms, shut-down pipelines and natural-gas wells, and more important for consumers, power outages.
What happens to power utilities with Texas capacity amid the weather chaos is anyone’s guess. There is the potential for windfall gains as well as big losses. Determining which, however, requires some business details that investors don’t usually have. A look at how the power-generation system operates makes clearer what is going on.
The U.S. electricity grid is made up of roughly 7,300 power plants, 160,000 miles of high-voltage power lines, and distribution transformers connecting 145 million customers. At the highest level, local grids are connected to three main interconnections: the Eastern connection, the Western connection, and Texas’s system, run by the Electric Reliability Council of Texas, or Ercot.
Ercot, one of several independent system operators in the country, is in charge of organizing the flow of electricity for Texans. The job is particularly difficult right now: Some power-generation capacity has been taken offline due to the cold, and demand is through the roof because temperatures are so low. People want to stay warm.
Some utility stocks could be affected by the aftermath of the vortex. “ERCOT power prices have seen the most explosive moves in power prices with real-time prices surging past $5,000 [per megawatt hour] during certain hours as Texas contends with the coldest winter temperatures since the polar vortex of 2013-14,” wrote BMO analyst James Thalacker in a Sunday research report.
Many U.S. residential customers see 12 or 15 cents a kilowatt hour on their electricity bills. That is $120 to $150 a megawatt hour, making what is going on in Texas highly unusual.
Thalacker pointed out that
Vistra
(VST) and
NRG Energy
(NRG) have a lot of Texas exposure relative to other utilities he covers. Those stocks were moving on Tuesday. Vistra stock closed up 2.7% to $21.91, while NRG Energy shares fell about 5.7% to $40.59. The
S&P 500,
for comparison, ended the day flat.
It’s tough to figure out if the market has it right, but the moves imply…
Read More: Texas Power Markets Are in Chaos. Here Are Two Stocks To Watch.